Current Yield

Current yield measures the annual income an investment generates relative to its current market price. It applies to both bonds and stocks, making it one of the most versatile yield calculations on the exam.

Current Yield Formula

For bonds:

• Current Yield = Annual coupon payment / Current market price
• The coupon payment is fixed at issuance, so current yield changes only when the market price moves
• Example: A $1,000 face value bond with a 5% coupon pays $50/year. If the market price drops to $900:
  • Current Yield = $50 / $900 = 5.56%
  • The yield rose because you are buying the same $50 income stream for less money

For stocks (dividend yield):

• Dividend Yield = Annual dividend / Current stock price
• Example: A stock pays $2/year in dividends and trades at $40:
  • Dividend Yield = $2 / $40 = 5%

Exam Tip: Gotchas

• Current yield only considers income (coupon or dividend). It ignores capital gains, capital losses, and the time value of money. If a question asks about "total return," current yield is not the answer.

Key Distinction: Current Yield vs. Total Return

• Current yield only measures income return - it ignores capital gains or losses entirely
• Total return captures both income and price changes, making it the more comprehensive measure
• Yield and price move inversely: as a bond's price rises, its current yield falls (and vice versa)

Bond Yield Relationships (Price vs. Yield)

The relationship between a bond's price and its yield measures follows a predictable pattern:

• A bond purchased at a discount will have a YTM higher than current yield because the investor also gains the difference between purchase price and par at maturity
• A bond purchased at a premium will have a YTM lower than current yield because the investor loses the difference between purchase price and par at maturity

Exam Tip: Gotchas

• Current yield only measures income return, NOT total return. A bond purchased at a discount has a YTM higher than its current yield because the investor also profits from the price moving toward par.
• The exam frequently tests the ranking of coupon rate, current yield, and YTM for premium and discount bonds. Memorize the order above.